“Credit Crunch” is one common way to describe America’s current economic situation. This basically means that the financial sector of our economy is struggling from a lack of funds from which they can offer credit to consumers, students, and businesses. The problem appears to be spiraling, as a lack of business credit is leading to lost jobs and lost jobs are leading to more loan defaults that end up further draining what the banks have available.

Student loan providers are facing many of the same problems, and this is on top of the problems they usually face like higher than average default rates among student borrowers. Federal lending programs are supposed to offset the extra risk that student loan companies take on, but many of these subsidy supports were removed in the last year in response to the peak of profitability that financial businesses reached about two years ago.

Now, a variety of proposals are floating around to restore profitability to the student loan industry. Ironically enough, many of the plans are many times more generous than the original system that was just last year the target of outrage and accusations of inflated profits at the expense of tax payers and student borrowers. One plan, backed by student loan companies and some Congressional leaders, mimics the way the Federal Reserve “bailed out” the banking and financial institutions: it would allow private companies to exchange risky student loans with the Department of Education for government securities.

While it would ensure that lenders have money to lend, the other effect is lowering the value of those government backed securities, and by extension, the dollar. This method of bailout is largely responsible for recent, sharp rises in gas and food prices.

If lenders are able to sell student loans to the Department of Education while retaining service and origination payments, the profitability would be guaranteed and the risk would be distributed throughout the entire economy.

Of course, the alternatives must be considered. The direct federal loan program is attracting more college participation, and although it is known for inefficiency it would still allow any gains made through paid loans to come back into the funding system. Allowing loan companies to adapt or fail would probably drive down the cost of education, but at the expense of declining quality standards in colleges & universities. If less students could find loans, schools would be forced to eliminate staff and increase class sizes in order to charge lower tuition that more students could afford. Many schools deep in their own debt might fail outright.

14 Responses to “Department of Education might buy Student Loans”

It’s interesting to me that we depend upon private, for-profit entities to fund part of a program designed to increase access to higher education. Then, when the private, for-profit entities act like for-profit entities by remaining in profitable market segments and pulling away from less (or non) profitable market segments, we accuse them of “redlining” or call their morals into question.

Goerge Jr,
I think its human nature. But from what i heard and read on the news, part of the rescue package will be use to buy some of the student loans from the the big lenders life Freddie Mac and Fannie Mae. that’s true and more students can benefit from it.

If we truly want to stimulate the economy, we can start by reforming the student loan industry.

Student loans are the only form of consumer debt lacking standard consumer protections. In 1997, student loan companies such as Sallie Mae successfully lobbied Congress to amend the Higher Education Act and remove consumer protections, making defaulted student loans among the most lucrative and easy debts to collect.

The loan companies actually have a vested interest in debtors defaulting on their loans and have great leeway to collect on those loans.

Harvard Professor Elizabeth Warren was quoted in a Wall Street Journal article as saying that “student loan debt collectors have power that would make a mobster envious.”

The student loan companies can garnish or seize Social Security and disability payments, and even raid personal bank accounts without a court order. A number of people have actually been driven to suicide by their collection tactics.

The only people benefiting from this situation are the CEOs and corporate officers of companies like Sallie Mae. The outrageous profits they make would be better off circulating in local economies. Reform is badly needed.

Brian is a smart guy, but blames the wrong people for the problem. He has a right to blame Sallie Mae because they also guarantee loans for the federal government. All other private lending companies get their loans through lines of credit with the Department of Education, and rely on a federal state entities to guarantee these loans in case of default. A private lending company does not have the ability to garnish wages, but when your loans go a year past due the guarantee agency purchases your loans. In default this federal agency does have the right to garnish wages and so fourth. Lenders make so such money because the guarantee agency buys the loan plus interest for that year of deliquency, then adds 18% against your balance for the government having to collect the loan, and not to mention the 3% higher interest rate they charge while in default. This all becomes principle once you finally contact answer your guarantors phone calls or take the initiative to contact them yourself, and go through a rehabilitation that constists of one year of on time payments. But even then your lender is not profitting from that principle balance. They make a proffit from a portion of the interest. Larger principles equas more interest paid back. What many people fail to mention are the options you have with your lender before you get into default. Your lender can apply government given deferments and forbearances to hold your payments off. You could graduate and not work for 12 years without making a payment on student loans. Of course there is interest accrual on a portion or all of the loans, but if you have some college education and can not find a job in 12 years then your just not trying hard enough! I wouldn’t be where I am without taking out student loans. I don’t agree with the majority of how they work, and curse them once a month when I write my check, but sometimes you need to take responsibilty for the decisions you have made and the path those decisions took you down. There is a bill that would end private student loan lending, removing free enterprise from this market, and making the Department of Education the largest, most profittable bank in the country. Ever wonder where the great benefits lenders offered you went? This was that huge profitt lenders where making off of you that was reduced by the government. A limitation of free enterprises reduces competition which reduces your power as the borrower. See what happens when the government makes most of the rules? Don’t let them make all if the rules. As a student you should fight for borrower choice, and free enterprise in lending. If you don’t then you haven’t paid attention. This bill is happening now!

With loans even though the main objective of taking the loan may have been achieved chances are that between the loan and all the other financial obligations you already have then what is left over is never enough.

I like the idea of spreading the responsibility and the interest return as well. Even in a good market, our school system is lacking funds. Maybe some of the proposals would help get student loans back on track.

I think the horrible economy we have, is by design, and not by accident. We are in a period of time where the middle class is being squeezed from every angle. I think they need to push back, really hard!

I am disabled and i have astudent loan that has been in default forever I could never get my income tax I was astruggling single parent without any child support and never could get my income tax return so it always kept me down plua the threts from the collection co were hrrifing me telling me they didn’t care if I had money left over to buy toilet paper to wipe my ass and things like you aren’t going to like what we are going to do to you” I paid on it in the begginning and then they sold it to someone and i lost track where and then life got me and keeping my tax returns started a snow ball effect,so enough is enough please help I live on 700 a month no car no nothing can you help ????????????????????????????